<PAGE>
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- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER: 0-26310
NETSCAPE COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 94-3200270
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification
No.)
</TABLE>
501 EAST MIDDLEFIELD ROAD, MOUNTAIN VIEW, CALIFORNIA 94043
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (415) 254-1900
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes /X/ No / /
The number of shares outstanding of the registrant's Common Stock as of October
18, 1996 was 84,537,020.
- --------------------------------------------------------------------------------
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<PAGE>
INDEX
NETSCAPE COMMUNICATIONS CORPORATION
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
---------
<S> <C> <C> <C>
Item 1. Financial Statements (Unaudited)
(a) Condensed Consolidated Balance Sheets as of September 30, 1996 and December 31, 1995..... 3
(b) Condensed Consolidated Statements of Operations for the Three and Nine Months Ended
September 30, 1996 and 1995.............................................................. 4
(c) Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30,
1996 and 1995............................................................................ 5
(d) Notes to Condensed Consolidated Financial Statements..................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................................................. 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.................................................................... 15
Signatures..................................................................................................... 16
</TABLE>
2
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NETSCAPE COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
(IN THOUSANDS)
<S> <C> <C>
Current assets:
Cash and cash equivalents......................................................... $ 37,614 $ 55,276
Short-term investments............................................................ 60,550 96,841
Accounts receivable, net.......................................................... 93,081 27,099
Other current assets.............................................................. 11,411 6,405
------------- ------------
Total current assets............................................................ 202,656 185,621
Property and equipment, net......................................................... 73,553 20,872
Long-term investments............................................................... 46,443 21,714
Other assets........................................................................ 9,096 2,947
------------- ------------
$ 331,748 $ 231,154
------------- ------------
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................................. $ 25,962 $ 8,533
Accrued compensation and related liabilities...................................... 13,778 6,567
Other accrued liabilities......................................................... 15,811 6,111
Deferred revenues................................................................. 75,126 30,032
Current portion of long-term obligations and installment notes payable............ 1,408 1,326
------------- ------------
Total current liabilities....................................................... 132,085 52,569
Long-term obligations and installment notes payable................................. 659 1,198
Stockholders' equity:
Preferred stock, common stock and additional paid-in capital...................... 215,239 207,196
Notes receivable from stockholders................................................ (10) (763)
Deferred compensation............................................................. (6,742) (8,584)
Unrealized gain on available-for-sale securities.................................. 1,576 2,157
Accumulated deficit............................................................... (10,982) (22,716)
Accumulated translation adjustment................................................ (77) 97
------------- ------------
Total stockholders' equity...................................................... 199,004 177,387
------------- ------------
$ 331,748 $ 231,154
------------- ------------
------------- ------------
</TABLE>
See accompanying notes.
3
<PAGE>
NETSCAPE COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
1996 1995 1996 1995
---------- --------- ---------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues:
Product revenues................................................. $ 83,761 $ 21,979 $ 195,108 $ 41,131
Service revenues................................................. 16,255 1,329 36,035 2,694
---------- --------- ---------- ---------
Total revenues................................................. 100,016 23,308 231,143 43,825
Cost of revenues:
Cost of product revenues......................................... 10,900 2,639 27,414 4,052
Cost of service revenues......................................... 3,794 380 7,802 917
---------- --------- ---------- ---------
Total cost of revenues......................................... 14,694 3,019 35,216 4,969
---------- --------- ---------- ---------
Gross profit....................................................... 85,322 20,289 195,927 38,856
Operating expenses:
Research and development......................................... 24,211 7,117 56,163 15,049
Sales and marketing.............................................. 43,865 11,785 102,176 24,720
General and administrative....................................... 8,286 2,568 19,510 7,554
Merger related charges........................................... -- -- 6,100 --
Property rights agreement and related charges.................... -- -- -- 500
---------- --------- ---------- ---------
Total operating expenses....................................... 76,362 21,470 183,949 47,823
---------- --------- ---------- ---------
Operating income (loss)............................................ 8,960 (1,181) 11,978 (8,967)
Interest income, net............................................. 2,178 1,356 6,487 1,843
Equity in net losses of joint ventures........................... (586) -- (1,002) --
---------- --------- ---------- ---------
Interest and other income, net................................. 1,592 1,356 5,485 1,843
---------- --------- ---------- ---------
Income (loss) before income taxes.................................. 10,552 175 17,463 (7,124)
Provision for income taxes......................................... 2,895 -- 5,311 --
---------- --------- ---------- ---------
Net income (loss).................................................. $ 7,657 $ 175 $ 12,152 $ (7,124)
---------- --------- ---------- ---------
---------- --------- ---------- ---------
Net income (loss) per share........................................ $ 0.09 $ 0.00 $ 0.14 $ (0.10)
---------- --------- ---------- ---------
---------- --------- ---------- ---------
Shares used in computing net income (loss) per share............... 87,883 80,832 86,941 73,120
---------- --------- ---------- ---------
---------- --------- ---------- ---------
</TABLE>
See accompanying notes.
4
<PAGE>
NETSCAPE COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
1996 1995
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income(loss)........................................................................ $ 12,152 $ (7,124)
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and amortization....................................................... 10,604 1,591
Amortization of deferred compensation............................................... 1,842 1,889
Changes in assets and liabilities:
Accounts receivable................................................................. (65,979) (17,397)
Other current assets................................................................ (4,992) (2,175)
Accounts payable.................................................................... 17,279 8,991
Accrued compensation and related liabilities........................................ 9,375 1,398
Other accrued liabilities........................................................... 7,201 4,529
Deferred revenues................................................................... 45,094 15,340
----------- -----------
Net cash provided by operating activities............................................... 32,576 7,042
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures.................................................................... (63,201) (12,631)
Increase in other assets................................................................ (5,942) (1,365)
Purchases of investments available-for-sale............................................. (306,301) (112,908)
Maturity of investments available-for-sale.............................................. 202,531 --
Sale of investments available-for-sale.................................................. 114,753 --
----------- -----------
Net cash used in investing activities................................................... (58,160) (126,904)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of installment notes payable..................................... -- 2,243
Payments on installment notes payable................................................... (457) (240)
Proceeds from issuance of preferred and common stock, net............................... 8,379 171,158
----------- -----------
Net cash provided by financing activities............................................... 7,922 173,161
Net increase (decrease) in cash and cash equivalents.................................... (17,662) 53,299
Cash and cash equivalents at beginning of period........................................ 55,276 10,190
----------- -----------
Cash and cash equivalents at end of period.............................................. $ 37,614 $ 63,489
----------- -----------
----------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Income taxes paid....................................................................... $ 1,029 $ 231
----------- -----------
----------- -----------
</TABLE>
See accompanying notes.
5
<PAGE>
NETSCAPE COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
reflect all adjustments consisting of normal recurring adjustments which, in the
opinion of management, are necessary for a fair presentation of the results for
the periods shown. The results of operations for such periods are not
necessarily indicative of the results expected for the full fiscal year or for
any future period. The accompanying financial statements should be read in
conjunction with the audited consolidated financial statements of Netscape
Communications Corporation ("Netscape" or the "Company") for the year ended
December 31, 1995 and the notes thereto incorporated by reference into the
Company's Form 10-K (as defined below), the unaudited condensed consolidated
financial statements for the quarters ended March 31, 1996 and June 30, 1996
included in the Company's Quarterly Reports on Form 10-Q for the periods then
ended and the audited supplemental condensed consolidated financial statements
included in the Form 10-K/A Amendment No. 2 (the "Form 10-K/A") to the Company's
Annual Report on Form 10-K for the year ended December 31, 1995 (the "Form
10-K"). Certain prior period balances have been reclassified to conform with the
current period presentation.
In the quarter ended June 30, 1996, the Company completed its acquisitions
of InSoft, Inc. ("InSoft"), Netcode Corporation ("Netcode") and Paper Software,
Inc. ("Paper") under the pooling of interests method of accounting. All results
have been restated to reflect the Company's acquisition of InSoft. Operating
results since January 1, 1996 have been restated to reflect the Company's
acquisitions of Netcode and Paper. Operating results for 1995 and prior periods
have not been restated to reflect the acquisitions of Netcode and Paper as such
adjustments are immaterial.
PER SHARE DATA
Net income (loss) per share is computed using the weighted average number of
common and dilutive common equivalent shares outstanding during the period.
Dilutive common equivalent shares consist of the incremental common shares
issuable upon the exercise of stock options and warrants using the treasury
stock method.
CASH, CASH EQUIVALENTS, SHORT AND LONG-TERM INVESTMENTS
Cash and cash equivalents consist of cash on deposit with banks and money
market instruments with original maturity dates of 90 days or less. Short and
long-term investments primarily consist of investment grade debt securities with
original maturity dates between 90 days and three years. The debt securities are
all classified as available-for-sale. Long-term investments additionally include
equity holdings in both public and private high-technology companies. The public
equity securities with a readily determinable fair value have been classified as
available-for-sale. Available-for-sale securities are stated at fair value as
determined by the quoted market prices of the securities.
REVENUE RECOGNITION
The Company's product revenues are derived from product licensing fees,
while service revenues are derived from fees for maintenance and support,
training, consulting and advertising space. Product revenues are generally
recognized upon delivery, net of allowances for estimated future returns,
provided that no significant vendor obligations remain and collection of the
resulting receivable is deemed probable. Product revenues from original
equipment manufacturers are generally recognized upon notification of delivery
to the end user. Service revenues from customer maintenance fees for ongoing
customer support and product updates are recognized ratably over the term of the
maintenance period which is typically 12
6
<PAGE>
NETSCAPE COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
months. Payments for maintenance fees are generally made in advance and are
nonrefundable. Service revenues from training and consulting are recognized when
the services are performed. Service revenues from the sale of advertising space
are recognized in the period in which the advertisement is displayed on a World
Wide Web ("Web") page of the Company. Costs related to insignificant
obligations, primarily telephone support, are accrued upon shipment and included
in cost of revenues.
ACQUISITION OF INSOFT, INC.
In April 1996, the Company completed its acquisition of InSoft, a provider
of network-based communications and collaborative software for the enterprise,
in a transaction accounted for as a pooling of interests. Under the terms of the
acquisition agreement, Netscape purchased all of the outstanding capital stock
and assumed all of the outstanding stock options of InSoft, a privately held
company, for an aggregate of 2.0 million shares of Netscape stock. The results
of operations for InSoft are included in the consolidated results of operations
for all periods presented.
The unaudited pro forma results of operations of the combined companies for
the years ended December 31, 1994 and 1995 and the three months ended March 31,
1996 are as follows:
<TABLE>
<CAPTION>
NETSCAPE INSOFT (ADJUSTMENTS) COMBINED
---------- --------- --------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Three months ended March 31, 1996
Net revenues..................... $ 55,001 $ 1,120 -- $ 56,121
Net income (loss)................ 4,712 (930) 233 4,015
Net income (loss) per share...... 0.06 (0.78) -- 0.05
Year ended December 31, 1995
Net revenues..................... $ 80,656 $ 4,731 -- $ 85,387
Net loss......................... (3,441) (3,172) -- (6,613)
Net loss per share............... (0.05) (2.70) -- (0.09)
Year ended December 31, 1994
Net revenues..................... $ 1,403 $ 2,735 -- $ 4,138
Net loss......................... (11,879) (1,951) -- (13,830)
Net loss per share............... (0.18) (1.66) -- (0.20)
</TABLE>
The unaudited pro forma results of operations of the combined companies
reflect a decrease to the income tax provision for the quarter ended March 31,
1996 as a result of utilization of InSoft's net operating losses. The unaudited
pro forma information is not necessarily indicative of the actual results of
operations had the acquisition occurred at the beginning of the periods
indicated, nor should it be used to project the Company's results of operations
for any future date or period.
JOINT VENTURES
The Company entered into two joint ventures during the quarter ended June
30, 1996 which required the contribution of certain technology licenses and cash
for a 50% or less interest in each of the companies. The Company reports its
share of earnings and losses of the joint ventures under the equity method of
accounting. Each of the joint ventures is in the development stage and will
incur escalating losses in the near term. The balance of investments in joint
ventures at September 30, 1996 was insignificant.
STOCK OPTION REPRICING
In September 1996, the Board of Directors authorized the repricing of
options to purchase 3,990,708 shares of common stock effective as of the close
of business on September 30, 1996 to fair market value at the effective date
which was $35.38 per share. Vested repriced options may not be exercised until
March 1, 1997. No stockholders owning 1% or more of the Company's Common Stock
participated in the repricing.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company's operating performance each quarter is subject to various risks
and uncertainties as discussed in the Company's Form 10-K/A, the First Annual
Report 1995 to Stockholders (the "Annual Report") and the Quarterly Reports on
Form 10-Q for the quarters ended March 31, 1996 and June 30, 1996 (the "Form
10-Qs"). The following discussion should be read in conjunction with the section
entitled "Factors Affecting the Company's Business, Operating Results and
Financial Condition" in the Form 10-K/A, the sections entitled "Management's
Discussion and Analysis" in the Annual Report and "Supplemental Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Form 10-K/A.
OVERVIEW
Netscape Communications Corporation ("Netscape" or the "Company") is a
leading provider of open software for linking people and information over
private transmission control protocol/Internet protocol ("TCP/IP")-based
enterprise networks ("intranets") and the Internet. The Company was incorporated
in April 1994, and completed business combinations with Collabra Software, Inc.
("Collabra") in November 1995 and InSoft, Inc. ("InSoft") in April 1996. Each of
the business combinations was treated as a pooling of interests for accounting
purposes, and accordingly, the historical financial statements for the Company
have been restated as if the transactions occurred at the beginning of the
earliest period presented. The Company additionally completed business
combinations with Netcode Corporation ("Netcode") and Paper Software, Inc.
("Paper") in April 1996 and May 1996, respectively, in transactions accounted
for as pooling of interests. The historical results of operations for Netcode
and Paper are not material in relation to those of Netscape and financial
information for 1995 and prior periods have not been restated to reflect the
Netcode and Paper business combinations. Operating results since January 1,
1996, however, have been restated to reflect the operating results of Netcode
and Paper.
In the third quarter of 1996, Netscape experienced significant growth in
several aspects of its business. Revenues of $100.0 million reflected an
increase of 33.3% over the immediately prior quarter. In addition, the Company
continued to make investments in all aspects of its business in order to enable
growth. Consistent with the prior quarter, such investments primarily included
the hiring of permanent and contract labor in research and development, the
expansion of facilities in the United States, Europe and the Far East, ongoing
investment in sales and marketing, and further investment in major management
information systems across the majority of the Company's functional areas.
Operating income in the quarter of $9.0 million reflected a significant increase
over operating income of $528,000 reported in the immediately prior quarter, or
an increase of 35.2% over the immediately prior quarter's operating income,
excluding merger related charges, of $6.6 million.
The Company believes that significant ongoing investment in all areas of the
business will continue to be critical to the success of Netscape. Specifically,
the Company plans to continue increasing its operating expenses to fund greater
levels of research and development, expand the sales and marketing
infrastructure domestically and internationally, improve core management
information systems and broaden customer support capabilities. The Company also
continues to seek acquisitions, strategic investments and joint ventures that
complement the Company's overall business strategy. As a result of these
factors, the Company directs a significant percentage of its revenues towards
operating expenses and towards non-operating expenses associated with equity
interests in joint ventures and strategic investments. The Company anticipates
continuing to do so for the near future, which may adversely impact operating
results, particularly after adjusting for the impact of any merger related
charges and any amortization of goodwill from acquisitions accounted for by
purchase method accounting. Earnings per share in the third quarter of 1996 were
$0.09 as compared to $0.01 in the immediately prior quarter, or $0.07 in the
immediately prior quarter excluding merger related charges. Net income was 7.7%
of total revenues in the third quarter of 1996 as compared to 1.2% in the
immediately prior quarter, or 7.7% in the immediately prior quarter excluding
the impact of merger related charges.
8
<PAGE>
Although Netscape has achieved earnings per share growth in previous
quarters, the Company's expenses are relatively fixed in the near term and
unexpected variances in planned revenues, which are difficult to forecast, can
result in variations in operating margins and earnings. In addition, the Company
typically operates with minimal backlog, therefore, quarterly sales and
operating results generally depend on the volume and timing of and ability to
fulfill orders received within the quarter, which are difficult to forecast. The
Company typically recognizes a substantial portion of its revenues in the last
month of each quarter. Accordingly, the Company may be unable to adjust spending
in a timely manner to compensate for any unexpected revenue shortfall. Any
significant shortfall of demand for the Company's products and services in
relation to the Company's expectations would have an immediate material adverse
impact on the Company's business, operating results and financial condition.
Further, as the Company becomes increasingly focused on sales to enterprise
customers, the Company expects that a limited number of large sales may account
for a significant portion of revenue in some quarters, resulting in fluctuations
in revenue in future periods and adversely impacting operating results in
periods of lower than expected revenue. Moreover, the Company (i) plans to
continue to increase its operating expenses to fund greater levels of research
and development, increase its sales and marketing operations, develop new
distribution channels, improve its operational and financial systems and broaden
its customer support capabilities and (ii) may continue to incur significant
merger-related charges and other increases in operating expenses associated with
recently completed and any future acquisitions. To the extent that such expenses
precede or are not subsequently followed by increased revenues, the Company's
business, operating results and financial condition will be materially adversely
affected.
The Company expects to experience significant fluctuations in future
quarterly operating results that may be caused by many factors, including demand
for the Company's products, introduction or enhancement of products by the
Company and its competitors, market acceptance of new products, the timing of
large sales (particularly to enterprise customers), price reductions by the
Company (such as those made in October 1995 and March 1996) or its competitors,
changes in how products are priced (such as the change in client and server
pricing announced in October 1996), the mix of distribution channels through
which products are sold, the mix of products and services sold, the mix of
international and North American revenues, costs of litigation, lengthy sales
cycles and general economic conditions. In particular, as the Company becomes
increasingly focused on sales to enterprise customers the Company believes that
quarterly operating results may fluctuate due to the timing of revenue from a
limited number of large sales. In addition, as a strategic response to changes
in the competitive environment, the Company may from time to time make certain
pricing or marketing decisions (such as the recently announced change in client
and server pricing) or business combinations (such as the Collabra, InSoft,
Netcode and Paper business combinations) that could have a material adverse
effect on the Company's business, results of operations or financial condition.
As a result, the Company believes that period-to-period comparisons of its
results of operations are not necessarily meaningful and should not be relied
upon as any indication of future performance. Because of all of the foregoing
factors, it is likely that in some future quarters the Company's operating
results will be below the expectations of public market analysts and investors.
In such event, the price of the Company's common stock would likely be
materially adversely affected.
RESULTS OF OPERATIONS
The following table sets forth operating results as a percentage of total
revenues for the three month periods ended September 30, 1996 and June 30, 1996.
Due to the significant growth in revenues and operating expenses between the
three and nine month periods ended September 30, 1995 versus the three
9
<PAGE>
and nine month periods ended September 30, 1996, the Company believes that a
comparison of operating results between the comparable periods in each year is
not meaningful.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------
<S> <C> <C> <C> <C>
SEPTEMBER 30, 1996 JUNE 30, 1996
----------------------- -----------------------
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
(UNAUDITED)
Total revenues...................................................... $ 100,016 100.0 % $ 75,006 100.0 %
Cost of revenues.................................................... 14,694 14.7 % 12,028 16.0 %
---------- ----- ---------- -----
Gross profit........................................................ 85,322 85.3 % 62,978 84.0 %
Operating expenses:
Research and development.......................................... 24,211 24.2 % 17,826 23.8 %
Sales and marketing............................................... 43,865 43.9 % 32,506 43.3 %
General and administrative........................................ 8,286 8.3 % 6,018 8.0 %
Merger related charges............................................ -- -- 6,100 8.1 %
---------- ----- ---------- -----
Total operating expenses........................................ 76,362 76.4 % 62,450 83.3 %
---------- ----- ---------- -----
Operating income.................................................... 8,960 9.0 % 528 0.7 %
Interest income, net.............................................. 2,178 2.2 % 1,878 2.5 %
Equity in net losses of joint ventures............................ (586) (0.6 )% (416) (0.6 )%
---------- ----- ---------- -----
Interest and other income, net.................................. 1,592 1.6 % 1,462 1.9 %
---------- ----- ---------- -----
Income before income taxes.......................................... 10,552 10.6 % 1,990 2.7 %
Provision for income taxes.......................................... 2,895 2.9 % 1,084 1.4 %
---------- ----- ---------- -----
Net income.......................................................... $ 7,657 7.7 % $ 906 1.2 %
---------- ----- ---------- -----
---------- ----- ---------- -----
Net income per share................................................ $ 0.09 $ 0.01
---------- ----------
---------- ----------
Net income per share excluding merger related charges (1)........... $ 0.09 $ 0.07
---------- ----------
---------- ----------
</TABLE>
- ------------------------
(1) Net income per share excluding merger related charges reflects actual net
income per share adjusted for the impact of $6.1 million ($4.9 million after
tax) in merger related charges incurred during the quarter ended June 30,
1996.
REVENUES
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------
<S> <C> <C> <C> <C>
SEPTEMBER 30, 1996 JUNE 30, 1996
----------------------- ----------------------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C>
(UNAUDITED)
Client............................................................... $ 58,867 58.9 % $ 45,052 60.1 %
Server, Commercial Applications and Other............................ 24,894 24.9 % 17,244 23.0 %
---------- ----- --------- -----
Total Product Revenues........................................... 83,761 83.8 % 62,296 83.1 %
Service.............................................................. 16,255 16.2 % 12,710 16.9 %
---------- ----- --------- -----
Total Revenues................................................... $ 100,016 100.0 % $ 75,006 100.0 %
---------- ----- --------- -----
---------- ----- --------- -----
</TABLE>
The Company derives its revenues from two product categories, product and
service. Product revenues consist of product licensing fees, and service
revenues consist of fees for technical support, training, consulting and
advertising space.
PRODUCT MIX. The Company experienced absolute growth in both major product
groups and in service revenues in the third quarter of 1996 as compared to the
immediately prior quarter. In general, the Company has experienced revenue
growth in all product lines offered by the Company as a result of higher
10
<PAGE>
volumes of software license and service related product sales, as opposed to
higher prices. Management believes that this growth reflects the general growth
in the market for intranet related software products in the corporate
environment. With respect to product revenues, the revenue growth between
periods in Client revenues was primarily attributable to unit volume increases
in sales of Netscape Navigator products as a result of new product
introductions. The Company released version 3.0 of Netscape Navigator as well as
Netscape Navigator Gold, including the Personal Edition retail versions of each
of these products, during the quarter ended September 30, 1996. With respect to
Server, Commercial Applications and Other revenue, the Company experienced
absolute revenue growth in both the Server and Commercial Applications product
lines. The quarter ended September 30, 1996 was the first full quarter that
Netscape SuiteSpot 2.0 server products were commercially available. In addition,
the Company released the retail version of its Netscape FastTrack Server 2.0
during the quarter. Commercial Applications products achieved record revenue
levels in the quarter.
The Company expects that the percentage of product revenues attributable to
its Server, Commercial Applications and Other software products as compared to
its Client product line will fluctuate in future periods depending upon the
timing of new product introductions, consumer buying patterns, pricing actions
taken by the Company, competition and other factors. In general, it is the
Company's strategy to achieve a greater percentage of revenues from its server
product family in future periods, although there can be no assurance that the
Company will be successful at achieving this goal. In conjunction with the
October 1996 announcement of the Company's planned Netscape SuiteSpot 3.0 and
Netscape Communicator 4.0 products, the Company announced a new pricing program
that will make these planned products available on a per seat basis. In
addition, certain planned servers will be available as standalone products with
a certain number of client access licenses. As customers increase the number of
users to prescribed levels, additional incremental license charges will apply,
subject to volume and other discounts. The Company's server and client product
lines account for the vast majority of the Company's total revenues. This recent
change in pricing and any future pricing changes could materially adversely
affect sales of the Company's products and consequently could materially
adversely affect the Company's business, operating results or financial
condition.
Service revenues experienced absolute growth quarter to quarter primarily
due to increased fees from advertising and increased sales of consulting
services and technical support services to a larger installed base of customers.
The Company believes that service revenues may increase as a percentage of
total revenues in future periods as a result of continued growth in the
installed base of technical support contracts, the continued expansion of the
Company's professional services consulting organization and an increase in
advertising revenues as a percentage of total revenues associated with the
placement of advertisements and other content on the Company's Web site.
CHANNEL MIX. The Company distributes substantially all of its products
through a combination of direct (including field sales, Internet-based sales and
telesales) and indirect (OEM, systems integrators, value added resellers and
software retailers) channels. The Company experienced absolute revenue growth
across all channels during the third quarter of 1996. In the quarter, the OEMs,
systems integrators, and value added resellers (together with systems
integrators referred to herein as "VARs") accounted for an aggregate of 49% of
total revenues as compared to 33% in the immediately prior quarter. The growth
in revenues in these indirect channels was primarily attributable to an
increased number of OEM and VARs as well as higher unit volumes by certain
existing OEM partners. Retail channel revenues accounted for 11% of revenues as
compared to 9% during the immediately prior quarter primarily as a result of
higher volume unit sales associated with the release of Netscape Navigator
Personal Edition, Netscape Navigator Gold Personal Edition and Netscape
FastTrack Server. Additionally, the Company has expanded the number of retail
distribution partners in each of the past two quarters.
11
<PAGE>
In general, it is the Company's strategy to increase indirect channel
revenues as a percentage of total revenues in future periods, although there can
be no assurance that the Company will be successful at accomplishing this goal.
Specifically, the Company believes that indirect channels will account for a
greater percentage of total revenues as OEM and VAR channels become more
established and are further leveraged by the Company, and as the absolute number
of OEM and VAR partners increases. In the near term, however, the distribution
of revenues among channels will fluctuate depending upon the timing of new
product releases, the Company's ability to expand and leverage OEMs and VARs
and, to a lesser extent, consumer buying patterns which typically impact
revenues in the retail channel.
GEOGRAPHIC MIX. International revenues (sales outside of North America)
accounted for approximately 30% of total revenues in the third quarter of 1996
as compared to approximately 30% in the immediately prior quarter. The increase
in international revenues, in both absolute dollars was primarily due to
increased sales and marketing efforts in Europe, Japan and the Pacific Rim, as
well as increased demand for Internet and intranet related products in
international markets. The Company is continuing to make significant investments
in international markets through the deployment of sales personnel in several
countries in Europe and the Pacific Rim, as well as through partnering with OEM
and VAR partners throughout the world. Management believes that international
revenues may account for a greater percentage of total revenues in future
periods, although this percentage may fluctuate in the near term as a result of
localized product release timing, competition and the general demand for
internet related products in international markets.
The Company invoices the customers of its international subsidiaries in both
U.S. dollars and the local currencies of its subsidiaries. The Company has not
engaged in foreign currency hedging activities and a portion of the
international revenues is currently subject to currency exchange fluctuation
risk. The Company anticipates that international revenues may increase as a
percentage of total revenues in the future, and, as a result, foreign currency
exposure may increase.
GROSS MARGIN
Cost of product revenues in both the second and third quarters of 1996
consisted primarily of the cost of product materials, licensed technology and
amounts paid to third party vendors for sales administration, order fulfillment
and telephone support to customers. Cost of service revenues in both quarters
consisted primarily of outside consulting services and personnel related costs
incurred in providing customer support, consulting services and, to a lesser
extent, fees paid to a third party related to the sale of advertising. Gross
margin earned on total revenues increased to 85.3% in the third quarter of 1996
from 84.0% in the immediately prior quarter. The increase was primarily a result
of the significant growth in OEM revenues quarter to quarter. Although sales
through resellers have lower average selling prices and generally adversely
affect gross margins, third quarter OEM revenues had relatively low associated
costs of revenues due to the absence of packaging costs which more than offset
the lower average selling prices during the quarter.
Gross margins on total revenues may be impacted by the mix of distribution
channels used by the Company, the mix of products or services sold, the mix of
product revenues versus service revenues, the mix of international versus North
American revenues and the prices charged for products. The Company typically
realizes higher gross margins on direct sales than on sales through VAR and
software retail channels, higher gross margins on North American sales than
international sales, and higher gross margins on product revenues than on
service revenues. In addition, the Company earns lower gross margins on
shrink-wrap product licenses than on right-to-copy licenses such as those
entered into with OEM partners. During the quarter ended September 30, 1996,
overall average sales prices were adversely impacted, and may continue to be
adversely impacted in the future, by increased sales through VAR and OEM
channels. In addition, gross margins may be adversly impacted by increased
international revenues as a percentage of total revenues and increased service
revenues as a percentage of total revenues. In addition, the Company believes
that the total gross margin may fluctuate in future periods due to increased
costs associated with
12
<PAGE>
licensed technology included in both client and server products and product
warranty costs, which includes free telephone support for Netscape Navigator
products.
OPERATING EXPENSES
The Company's operating expenses, excluding Property Rights Agreement and
Related Charges and Merger Related Charges, have increased in absolute dollar
amounts in every consecutive quarter through the quarter ended September 30,
1996. This trend reflects the Company's rapid growth and expansion in all
operating areas. The Company believes that continued expansion of operations is
essential to achieving and maintaining a strong competitive position. In
addition, the Company anticipates continued increases in its
infrastructure-related expenses, such as costs for facilities,
telecommunications and management information systems.
The Company recorded deferred compensation of $11.1 million for the
difference between the grant price and the deemed fair value of the Company's
common stock for stock options granted in the first six months of 1995.
Operating expenses in the first three quarters of 1996 each include $600,000 of
non-cash charges associated with the amortization of such deferred compensation.
The Company will record additional operating expenses of $600,000 in the fourth
quarter of 1996 and in periods thereafter associated with the amorization of
deferred compensation.
RESEARCH AND DEVELOPMENT. Research and development expenses consist
primarily of salaries and consulting fees to support product development.
Research and development expenses in the third quarter of 1996 increased in
absolute dollars and as a percentage of total revenue compared to the
immediately prior quarter. The increases in the quarter were primarily
attributable to increased staffing and consulting costs. Management believes
that research and development activities are a critical area for investment in
the Company and, as a result, intends to increase the level of research and
development expenses in future periods, which may cause continued increases in
such expenses as a percentage of total revenues in future periods.
SALES AND MARKETING. Sales and marketing expenses consist primarily of
compensation, consulting fees, trade show expenses and advertising. Sales and
marketing expenses in the third quarter of 1996 increased in absolute dollars
and as a percentage of total revenue as compared to the immediately prior
quarter. The increases in the third quarter of 1996 were primarily attributable
to increased staffing, marketing programs, costs associated with opening new
sales offices, sales commissions on increased sales, and continued investment in
Europe and the Far East. The Company intends to increase the level of sales and
marketing expenses in future periods, which may cause continued increases in
such expenses as a percentage of total revenues in future periods.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of salaries, fees for professional services and certain reserves.
General and administrative expenses in the third quarter of 1996 increased in
absolute dollars and as a percentage of total revenue as compared to the
immediately prior quarter. The increases in the period were primarily
attributable to increased staffing, legal expenditures and an increase in the
reserves for bad debt allowance to support higher revenue levels. The Company
intends to increase the level of general and administrative expenses in future
periods, which may cause continued increases in such expenses as a percentage of
total revenues in future periods.
INTEREST INCOME, NET
Net interest income increased by $300,000 in the third quarter of 1996 as
compared to the immediately prior quarter primarily as a result of the higher
pre-tax interest income earned on investment balances. Pre-tax interest income
in future periods may fluctuate as a result of fluctuations in average cash
balances maintained by the Company and changes to market rates for investments.
13
<PAGE>
EQUITY IN NET LOSSES OF JOINT VENTURES
Equity in net losses of joint ventures of $586,000 for the third quarter of
1996 reflects the Company's share of the net losses of the Company's joint
ventures under the equity method of accounting. The balance of investments in
joint ventures at September 30, 1996 was insignificant, although the Company may
provide additional contributions to these joint ventures in the future. Each of
the joint ventures is in the development stage and will incur escalating net
losses in the near term.
PROVISION FOR INCOME TAXES
The Company's effective tax rate for the third quarter and the nine months
ended September 30, 1996 was 27% and 30%, respectively. The provision for the
nine months ended September 30, 1996 was higher primarily due to the effect of
non-deductible merger expenses incurred in the second quarter.
The Company anticipates its fiscal 1996 effective tax rate, exclusive of the
effect of merger related charges, will be approximately 27%. This rate is lower
than the statutory U.S. federal rate due primarily to the benefit of net
operating loss and tax credit carryovers. This rate could change based upon a
change in the estimated amount or geographic mix of the Company's earnings,
changes in U.S. tax law, or additional benefits of net operating loss and credit
carryovers of future acquisitions.
FACTORS AFFECTING OPERATING RESULTS
The section entitled "Factors Affecting the Company's Business, Operating
Results and Financial Condition" in the Form 10-K/A is hereby incorporated
herein by reference.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1996, the Company's principal source of liquidity was
approximately $98.2 million in cash, cash equivalents and short-term
investments, a $53.9 million decrease from December 31, 1995 balances. During
the same period, long-term investments increased by $24.7 million to $46.4
million at September 30, 1996. Netscape invests predominantly in instruments
that are liquid, investment grade and have average maturities of less than one
year with the intent to make such funds readily available for strategic
investment and operating purposes.
For the nine months ended September 30, 1996, cash provided by operating
activities of $32.6 million was primarily due to increases in deferred revenues
of $45.1 million, accounts payable of $17.3 million and accrued liabilities of
$16.6 million, offset by increases in accounts receivable of $66.0 million. The
growth in deferred revenues was a result of an increase in non-refundable
pre-payments received pursuant to software license and support contracts.
Capital expenditures for the nine months ended September 30, 1996 totaled
$63.2 million and are expected to increase at an equal or greater pace in future
periods. Capital expenditures have generally been comprised of purchases of
computer hardware and software as well as leasehold improvements related to
leased facilities.
Management believes existing cash and investments together with cash flows
expected to be generated from operations will be sufficient to meet the
Company's operating requirements for at least the next twelve months.
Netscape does not currently have any lines of credit available and has not
paid cash dividends on its common stock.
14
<PAGE>
PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
Exhibit 11.1 -- Statements of Computation of Earnings Per Share.
Exhibit 27.1 -- Financial Data Schedule.
(b) Reports on Form 8-K:
On May 10, 1996, the Company filed a Current Report on Form 8-K dated
April 25, 1996 in conjunction with the acquisition of InSoft. On July 8,
1996, the Company filed a Form 8-K/A Amendment No. 1 to its Current
Report on Form 8-K dated April 25, 1996 which included the following
financial statements:
Pro Forma Combined Condensed Consolidated Balance Sheet at March 31,
1996.
Pro Forma Combined Condensed Consolidated Statement of Operations for the
period from Inception (February 9, 1993) to December 31, 1993.
Pro Forma Combined Condensed Consolidated Statement of Operations for the
year ended December 31, 1994.
Pro Forma Combined Condensed Consolidated Statement of Operations for the
year ended December 31, 1995.
Pro Forma Combined Condensed Consolidated Statement of Operations for the
three months ended March 31, 1996.
Notes to Pro Forma Combined Condensed Consolidated Financial Statements.
InSoft, Inc. Balance Sheets at December 31, 1994 and 1995 and March 31,
1996.
InSoft, Inc. Statements of Operations for the years ended December 31,
1993, 1994 and 1995.
InSoft, Inc. Statements of Stockholders' Equity (Deficit) as of December
31, 1993, 1994 and 1995 and as of March 31, 1996.
InSoft, Inc. Statements of Cash Flows for the years ended December 31,
1993, 1994 and 1995.
Notes to Financial Statements.
ITEMS 1, 2, 3, 4 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NETSCAPE COMMUNICATIONS CORPORATION
<TABLE>
<C> <S> <C>
Date: October 30, 1996 By: /s/ PETER L.S. CURRIE
-------------------------------------- -----------------------------------------
Peter L.S. Currie,
Senior Vice President and
Chief Financial Officer
(PRINCIPAL FINANCIAL OFFICER)
Date: October 30, 1996 By: /s/ NOREEN G. BERGIN
-------------------------------------- -----------------------------------------
Noreen G. Bergin
Vice President and Corporate Controller
(PRINCIPAL ACCOUNTING OFFICER)
</TABLE>
16
<PAGE>
EXHIBIT 11.1
NETSCAPE COMMUNICATIONS CORPORATION
STATEMENTS OF COMPUTATION OF EARNINGS PER SHARE
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1996 1995 1996 1995
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Primary:
Weighted average common stock outstanding including stock related to
SAB No. 64 and 83................................................. 84,440 77,851 83,141 73,120
Net effect of dilutive stock options based on the treasury stock
method using average market price................................. 3,443 2,981 3,800 --
--------- --------- --------- ---------
Total weighted average common and common equivalent shares
outstanding..................................................... 87,883 80,832 86,941 73,120
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income (loss)..................................................... $ 7,657 $ 175 $ 12,152 $ (7,124)
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income (loss) per share........................................... $ 0.09 $ 0.00 $ 0.14 $ (0.10)
--------- --------- --------- ---------
--------- --------- --------- ---------
Fully diluted:
Weighted average common stock outstanding including stock related to
SAB No. 64 and 83................................................. 84,440 77,851 83,141 73,120
Net effect of dilutive stock options based on the treasury stock
method using the greater of quarter-end or average market price... 3,533 3,286 3,871 --
--------- --------- --------- ---------
Total weighted average common and common equivalent shares
outstanding..................................................... 87,973 81,137 87,012 73,120
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income (loss)..................................................... $ 7,657 $ 175 $ 12,152 $ (7,124)
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income (loss) per share........................................... $ 0.09 $ 0.00 $ 0.14 $ (0.10)
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS IN THE QUARTERLY REPORT ON FORM 10-Q OF NETSCAPE
COMMUNICATIONS CORPORATION FOR THE QUARTER ENDED SEPTEMBER 30, 1996.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-START> JUL-01-1996 JAN-01-1996
<PERIOD-END> SEP-30-1996 SEP-30-1996
<EXCHANGE-RATE> 1.00 1.00
<CASH> 37,614 37,614
<SECURITIES> 60,550 60,550
<RECEIVABLES> 93,081 93,081
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 202,656 202,656
<PP&E> 73,553 73,553
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 331,748 331,748
<CURRENT-LIABILITIES> 132,085 132,085
<BONDS> 0 0
0 0
0 0
<COMMON> 215,239 215,239
<OTHER-SE> (16,235) (16,235)
<TOTAL-LIABILITY-AND-EQUITY> 331,748 331,748
<SALES> 83,761 195,108
<TOTAL-REVENUES> 100,016 231,143
<CGS> 10,900 27,414
<TOTAL-COSTS> 14,694 35,216
<OTHER-EXPENSES> 24,211 62,263
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 10,552 17,463
<INCOME-TAX> 2,895 5,311
<INCOME-CONTINUING> 7,657 12,152
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 7,657 12,152
<EPS-PRIMARY> 0.09 0.14
<EPS-DILUTED> 0.09 0.14
</TABLE>
